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Exam 5: Revenue Recognition

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Question 121

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Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?

A) Recognize interest expense.
B) Recognize interest revenue.
C) Recognize additional cost of goods sold.
D) Ignore the time value of money.

E) A) and B)
F) B) and C)

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Question 122

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Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for $3 million, which was received in cash at contract inception. Under the agreement, Deluxe Rooms is obligated to clean and prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis from August 1, 2018 to July 31, 2019. Required: Prepare any journal entry that Delux would record: (1) at inception of the contract and (2) at the end of 2018 to recognize all revenue associated with this contract that should be recognized in 2018.

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Question 123

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Revenue should be recognized over time for the construction of an annex to a building that the customer owns, even if the seller will not receive payment until the annex is completed.

Disclosure notes to the financial statements regarding significant revenue recognition policies are only required when they will not reveal important information to competitors, suppliers or customers.

Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents. • On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year. • On March 20, three of the most senior drivers at Terra abruptly left. As a result, Terra had to hire inexperienced drivers to fill the vacant positions. Consequently, Terra revised its estimate to a 30% chance that it would earn the semiannual bonus. • On June 30, Moose confirmed that there was no accident between January and June, so Terra would be entitled to the semiannual bonus. Terra bases estimates of variable consideration on the expected value it expects to receive. -Prepare Terra's March 31 journal entry to record the revenue earned from March 1 - March 31, as well as any appropriate adjustments to the revenue presumed already recorded as earned from January 1 - February 28.

If a license gives a customer access to functional intellectual property, revenue always should be recognized at the point in time that the customer can begin using the intellectual property.

Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500. -Other competing sellers in the same region charge an average of $250 for a set of goggles and $750 for the lessons, if sold separately. Beaumont Company usually sells at a 5% discount compared to other shops, since it is a bit farther away from the ocean. Required: What would be Beaumont's stand-alone selling price of the goggles and the lessons, based on adjusted market assessment approach?

On February 1^st, H&B Bank originated a loan for $50,000 at an interest rate of 7.2%. On March 15^th, an interest payment of $300 was received. Which of the following best describes when interest revenue should be recognized?

In 2018, KP Building Inc. began work on a four-year construction project (called Cincy One). The contract price is $300 million. KP recognizes revenue on this contract over time according to percentage of completion. At the end of 2018, the following financial statement information indicates the results to date for Cincy One: Required: Compute the following, placing your answer in the spaces provided and showing supporting computations below.

McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2017 and completed in 2018. Cost and other data are presented below: -Assume that McCombs recognizes revenue on this contract over time according to percentage of completion. Required: Compute the amount of gross profit recognized during 2017 and 2018.

The core revenue principle states that:

The cost recovery method of accounting for long-term construction contracts under IFRS is sometimes referred to as the:

When revenue is recognized over time versus upon completion of the contract, different amounts of total profit or loss are recognized for a particular contract.

Maas LLP developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Sunny Dale paid a licensing fee of $20,000 for a copy of the software. Although Sunny Dale can use the software as long as it wants, Maas expects that Sunny Dale will use the software for approximately 5 years. Maas does not anticipate any further interaction with Sunny Dale following transfer of the license. How much revenue should Maas recognize in the first year of the contract?

When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.

Silica Corporation constructs highly specialized communication satellites. A customer in Hong Kong recently placed an order for a cable TV satellite at a price of $20 million. The order was placed in April 2018, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the end of 2018, regardless of progress or cancellation. Silica uses "proportion of time" as its measure of progress toward completion. Required: When should Silica recognize revenue: at completion, or as the construction is performed?

To account for variable consideration using the most likely amount, the probability of each possible amount is multiplied by the possible amount to get an expected contract price.

GAAP that covers revenue recognition for multiple-element arrangements requires that a seller recognize revenue for a particular part if:

Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints from customers about room cleanliness. • On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will earn the quarterly bonus. • On May 5, Romano learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Romano revised its estimate downward to 40% that it would earn the quarterly bonus. • On June 30, Silvia notified Romano that, for the quarter ended, there were four complaints associated with room cleanliness, so Romano would receive the bonus. Two days later, Romano received all payments due for all services rendered in the second quarter, including the bonus. Romano bases estimates of variable consideration on the expected value of the consideration it expects to -Prepare Romano's May 30 journal entry to record the revenue earned in May, as well as any appropriate adjustments to the revenue earned in April.

Which of the following is not true about accounting for long-term construction contracts?